Speaker 1: This is Wall Street Week. I'm David Weston, bringing you
Speaker 1: stories of capitalism playing dice with the universe, the strange
Speaker 1: new world of quantum computing and how it may change
Speaker 1: our lives even more than AI plus, coming to terms
Speaker 1: with growing older and lower interest rates as Western nations
Speaker 1: face growing problems providing for the elderly. We take a
Speaker 1: look at the largest set of pension assets in Europe
Speaker 1: and why the Dutch are changing the way they invest
Speaker 1: those assets and turning concerns about data center energy consumption
Speaker 1: into a way to heat our houses. That's what they're
Speaker 1: doing in Finland. But we start with banking and how
Speaker 1: regulators in Europe and the United States are taking increasingly
Speaker 1: different approaches, creating both opportunities and challenges for Annaboutem, executive
Speaker 1: chairman of Spain's leading bank, Santander Bacos. Santander has had
Speaker 1: a big year. Give us a sense of how big
Speaker 1: a year it's been.
Speaker 2: It's been a great year. Our numbers will be totally
Speaker 2: on track to deliver all the numbers in our three
Speaker 2: year plan, and again in twenty five we're going to
Speaker 2: reach our profitability sixteen and a half percent. And for shareholders,
Speaker 2: you know great value creation, increasing different per share. Our
Speaker 2: share price is up one hundred percent, but there's still
Speaker 2: a lot of inherent value in our stock. Our multiples
Speaker 2: are still very attractive compared to US banks. For example,
Speaker 2: we're training a bit under ten times price earnings, and
Speaker 2: we deserve a premium to Europe and I would say
Speaker 2: even to the US banks because our profitability is getting
Speaker 2: better and we have growth.
Speaker 1: What were the main drivers of the success you've had
Speaker 1: this year?
Speaker 2: So I say it's an overnight success, ten years in
Speaker 2: the making. So since I took over inherited a group
Speaker 2: of banks, it was a big bank, but many different geographies,
Speaker 2: different business models, very disconnected and the whole vision is
Speaker 2: to bring them all together and they are a single,
Speaker 2: open financial services platform and that's what we have been
Speaker 2: working on. So this year, every single one of our
Speaker 2: five businesses is growing. We have simplified the organization. We
Speaker 2: sold Poland we bought in the UK, so UK business
Speaker 2: now is at scale and this is really the opportunity.
Speaker 2: At Santandre we have profitable growth for many years.
Speaker 1: Organically sometime there succeeded in selling half of its Polish
Speaker 1: unit this year, while other European banks, including UniCredit and
Speaker 1: BBVA had a tough time getting deals done. As you say,
Speaker 1: you sold Poland, you bought in the UK. There were
Speaker 1: other banks in Europe that tried to do transactions this
Speaker 1: year that didn't go so well. How come you got
Speaker 1: it done well? Y?
Speaker 2: You know, the stale of Poland was the largest cross
Speaker 2: border m and A in Europe in a decade. And
Speaker 2: in today's world, where governments defend their countries and you know,
Speaker 2: regulation is what it is, friendly deals are the way
Speaker 2: to go. And so I believe that's a secret.
Speaker 1: As you say, bacosana there as you inherit it is
Speaker 1: pretty far flung. I mean, you've got obviously Spain, you've
Speaker 1: got Europe, You've got UK, you've got US, Mexico, Brazil.
Speaker 1: How much is that helping baccos on there? That diversification.
Speaker 2: So in today's economy, either you're large and you have
Speaker 2: global scale, or you're very specialized and we have the scale.
Speaker 2: We're one of the largest banks in the world by
Speaker 2: number of customers one hundred and eighty million. That's more
Speaker 2: than the number one and number two bank in the
Speaker 2: United States together. We have added sixty million customers in
Speaker 2: the last ten years. And so you know that scale
Speaker 2: t to benefit from that scale, to have the operating leverage,
Speaker 2: you need to work across the company. You cannot just
Speaker 2: work separately by business or by geographies.
Speaker 1: One of your goals has been efficiency increasing the Efficiency Bank.
Speaker 1: How much success have you had, how much further can
Speaker 1: you take it?
Speaker 2: We're only just scratching the surface of our potential as
Speaker 2: a group. We have gravity, our cooperating system. We have
Speaker 2: our payments core system, which is allowing us to reduce
Speaker 2: cost per transaction in the last few years by a third.
Speaker 2: What is now coming is what you as a customer
Speaker 2: are going to see, which is the Open Bank. The
Speaker 2: front end this year will have flat to downcost and
Speaker 2: growing top line and this should continue into the next
Speaker 2: few years. And again organically, you know, we are in
Speaker 2: markets with one point two one point three billion people
Speaker 2: where we are at scale in each one of them,
Speaker 2: and building our own platforms is something that very few banks,
Speaker 2: very few companies have in the world today.
Speaker 1: One of Santantaier's strongest verticals is it's auto business, working
Speaker 1: with dealerships at fourteen thousand points of sale as well
Speaker 1: as through its digital platform Open Bank.
Speaker 2: The last two years delinquencies were very low during COVID
Speaker 2: have normalized, so they have been going up. But our
Speaker 2: final loss rate is actually stable over the last twelve months,
Speaker 2: and consumers are actually you know, getting up to date
Speaker 2: on their loans even though they get a bit behind.
Speaker 2: So the loss rates are stable and we're not seeing
Speaker 2: anything right now that tells us the US consumer on
Speaker 2: average at least is having any issues. It's very solid.
Speaker 1: We see interest rates coming down in Europe. Now what
Speaker 1: does that do to your bank and the banks generally.
Speaker 2: So the way the terminal rate and you know, we
Speaker 2: can have a debate about what that is in Europe
Speaker 2: or in the US, given the size of a level
Speaker 2: of government debt, given demographics, defence, spending, deg organization. You know,
Speaker 2: we don't see that rate being below two percent in Europe,
Speaker 2: probably below three in the United States something like that.
Speaker 2: And that is a very good level for banks because
Speaker 2: it is high enough for us to have a margin,
Speaker 2: but not that high that the credit gets bad. Rates
Speaker 2: are at a level that I think will allow growth
Speaker 2: to remain around three percent globally right now. By the way,
Speaker 2: that's not fast enough, but at least we're growing.
Speaker 1: Regulation maybe one thing holding down growth in Europe. In
Speaker 1: the last six years, the EU has added thirteen thousand
Speaker 1: new banking rules. Well, the US came up with only
Speaker 1: thirty five hundred. Give us your sense of regulation of
Speaker 1: banks in Europe versus the United States.
Speaker 2: Well, I think regulation, like life, is all about balance, right,
Speaker 2: and so we do believe in smart regulation. But we've
Speaker 2: gone way too far on certain items like capital. You know,
Speaker 2: soundless of banks doesn't just depend on capital, as we've seen.
Speaker 2: You know, if you look at the capital ratios of
Speaker 2: some of the banks that had problems, sore pretty high.
Speaker 2: And so we think against santandrev look at our CDs,
Speaker 2: it's one of the best in the world, including the
Speaker 2: best banks in the United States. Why because it's about
Speaker 2: a strong balance sheet, liquidity, you know, scale, business model,
Speaker 2: et cetera. So you know, we have gone as far
Speaker 2: as I think we need to go on capital, and
Speaker 2: now we need to be supporting growth.
Speaker 1: Mario Dragging came out with a famous report. What's been
Speaker 1: done with that report?
Speaker 2: So the ambition is very high. Even if you don't
Speaker 2: get to that, you're going to do pretty big things.
Speaker 2: And so this is the thing in Europe. What is
Speaker 2: our ambition for growth. Maria Dragi gave us a diagnosis.
Speaker 2: How much have we executed? Not more than ten percent
Speaker 2: in one year. So we have to have a much
Speaker 2: greater ambition on delivering on those recommendations. I've said it publicly.
Speaker 2: You know, if taxes every euro we make in Europe
Speaker 2: fifty eight cents go to the government, every dollar we
Speaker 2: make in the United States forty two, that's not a
Speaker 2: small number, but it's you know, significantly lower. So excess regulation,
Speaker 2: excess taxation actually is a tax on the economy and growth.
Speaker 2: At some point people don't invest, and so this is
Speaker 2: the balance we need to find. And Europe is getting
Speaker 2: further apart from the United States not coming closer.
Speaker 1: We also have regulation of banks at both the European
Speaker 1: level and member state level. To what extent do member
Speaker 1: state whole things back?
Speaker 2: Well, and there's one thing you didn't mention. So there's
Speaker 2: the regulation, and then that's the level two and three.
Speaker 2: Here in the United States, there's a lot of talk
Speaker 2: about the agencies. Clearly there's work to do in the
Speaker 2: United States. In Europe there's even much more work to do,
Speaker 2: right and I show at a conference on regulation only
Speaker 2: financial services regulation without the rest of the interpretation of
Speaker 2: the rules, which is thousands more ninety seven thousand lines,
Speaker 2: which a hundred don quixotes. You know, I showed it there,
Speaker 2: and so that is a second level. And then the
Speaker 2: third is what you say, which is the national rules
Speaker 2: and regulations.
Speaker 1: How do you decide how to allocate your capital for
Speaker 1: growth and to what extent is it affected by things
Speaker 1: like the relative different in regulatory levels.
Speaker 2: Well, that of course matters a lot, right if other
Speaker 2: things equal, every dollar I put in Europe, you know
Speaker 2: fifty eight of the profit goes to the state and
Speaker 2: forty two in the United States, Well, you know Europe
Speaker 2: is going to have to give me higher growth or
Speaker 2: higher profitability of both for us other things equal to
Speaker 2: go there. So yes, it matters a lot.
Speaker 1: There's innovation and creativity in Europe, entrepreneurship in Europe. Do
Speaker 1: the capital market support it.
Speaker 2: We have been pushing for a long time for capital
Speaker 2: markets union. We now have the Savings Union, which is
Speaker 2: not exactly the same, but it's gonna be helpful. The
Speaker 2: reality is that most of SME commercial lending comes from banks,
Speaker 2: and that is why it's so existential and urgent that
Speaker 2: we increase the ambition for change, because we will only
Speaker 2: be more competitive if there's more investment. This is coming
Speaker 2: from smaller, medium sized companies and a lot of that
Speaker 2: lending comes from the banks, and that's why capacity to
Speaker 2: lend has to expand. And that is what you know. Again, regulation,
Speaker 2: smart regulation would be very helpful.
Speaker 1: Is there any prospect of a unified banking regulatory system
Speaker 1: in Europe?
Speaker 2: Well, you know how many years did it take to
Speaker 2: build the United States two hundred Europe we've been going
Speaker 2: at this for fifty or sixty years, so it will happen.
Speaker 2: I'm not sure I will see.
Speaker 1: It coming up. We try to make sense of something
Speaker 1: that Einstein threw up his hands, trying to understand quantum
Speaker 1: mechanics and the revolution it may bring to computing by
Speaker 1: doing some things better than AI. This is a story
Speaker 1: about God playing dice with the universe, something Albert Einstein
Speaker 1: told us he didn't do. Back in nineteen twenty six,
Speaker 1: Einstein was criticizing physicists theory of quantum mechanics. Yet a
Speaker 1: century after Einstein's denial, billions of dollars are being invested
Speaker 1: today in taking that theory and turning it into reality,
Speaker 1: with the prospect of a revolution in computing, potentially larger
Speaker 1: even than generative AI.
Speaker 3: Quantum computing is very high potential Inbastors are increasingly asking
Speaker 3: us about the implications of quantum.
Speaker 4: Computing, quantum computing, quantum computing, political and state level economic
Speaker 4: supports to develop quantum and we want to be part
Speaker 4: of that.
Speaker 1: IBM is one of the companies leading the charge in
Speaker 1: quantum computing.
Speaker 5: Not IBM, we developed some of the very foundations of
Speaker 5: quantum information science starting as early as nineteen seventy.
Speaker 1: Jamie Garcia is the Director of Quantum Partnerships at IBM.
Speaker 1: A PhD chemist, she's working on quantum computers transforming healthcare
Speaker 1: at places like the Cleveland Clinic.
Speaker 5: Quantum computers are just a totally different paradigm to calculate
Speaker 5: solutions to problems, and so what most experts have done
Speaker 5: today that are studying quantum computing for different application spaces
Speaker 5: is to really sit down with the math and figure out, like,
Speaker 5: are the algorithms here that I can use and that
Speaker 5: I can exploit using a quantum computer going to bring
Speaker 5: me any sort of advantage over what can be done
Speaker 5: today in classical sort of state of the art techniques.
Speaker 1: At the core of classical computing are bits, single pieces
Speaker 1: of information that can have the value of zero or one,
Speaker 1: But quantum technology relies on cubits, a unit that can
Speaker 1: have multiple values simultaneously. It's like holding a coin in
Speaker 1: your hand that is heads, tails and everything in between
Speaker 1: until you open your hand to check. Physicist Jerry Chow
Speaker 1: is IBM's director of Quantum Hardware System Development.
Speaker 3: Really fundamentally, there's a different math, right's the mathematics of
Speaker 3: quantum mechanics that is governing how you actually manipulate these
Speaker 3: quantum bits, which then gives rise to a whole host
Speaker 3: of different opportunities for algorithms and types of problems that
Speaker 3: you can actually solve using quantum muters.
Speaker 5: As we're studying things today, we're using a lot of
Speaker 5: something called error mitigation as our approach to dealing with
Speaker 5: errors and ways in the system and in the quantum
Speaker 5: computer itself. This is going to continue to evolve. In fact,
Speaker 5: we think that next year we're going to see examples
Speaker 5: of what we call quantum advantage, which is where you're
Speaker 5: able to come up with a solution to a problem
Speaker 5: that is cheaper, faster, or more accurate than with classical alone.
Speaker 1: A turning point in IBM's efforts to make quantum computing
Speaker 1: a reality came when it made it available to the
Speaker 1: world on the.
Speaker 5: Cloud twenty sixteen.
Speaker 3: The IBM Quantum Experience was really a pivotal moment for
Speaker 3: us in terms of getting quantum computers for the first
Speaker 3: time out onto the cloud and into the hands of anybody,
Speaker 3: really people. Right. What's interesting is that before that period,
Speaker 3: I'd say, it was really much more in the realm
Speaker 3: of physics, right that we were doing experiments on small devices,
Speaker 3: cubit devices that we were looking at, understanding how they worked,
Speaker 3: trying to make them better, but we didn't have any
Speaker 3: kind of real thought about how is this going to
Speaker 3: be used for computation.
Speaker 1: In the nine years since you put Quantum Experience out there,
Speaker 1: what is what have you learned at IBM?
Speaker 3: I think what I learned from that experience really was
Speaker 3: that there was a whole lot of people out there
Speaker 3: who wanted to touch and learn about quantum. I think
Speaker 3: we were sitting there that first night after we launched it,
Speaker 3: watching these circuits coming in and people were actually running things,
Speaker 3: and we were like, oh wow, this is picking up
Speaker 3: some steam here. And then you know, to this point,
Speaker 3: we've had tremendous uptake in terms of using the platform
Speaker 3: to actually generate new papers and research. Thousands of papers
Speaker 3: have been generated which have been would have been impossible
Speaker 3: for us to do, just as individual scientists or researchers
Speaker 3: studying these devices in our own lab and working with
Speaker 3: other scientists and collaborations, and.
Speaker 1: In success, that community could go places that classical computing,
Speaker 1: even using the large language models of AI, could never
Speaker 1: take us. So it's not just speech, it's actual accuracy.
Speaker 1: When we're using classical no matter how infinite we get,
Speaker 1: it's an approximation.
Speaker 3: Right, Absolutely, it's absolutely not just not not a question
Speaker 3: about speed. The whole point of the quantum computer and
Speaker 3: what it can do is that it can give us
Speaker 3: the ability to actually get potentially more accurate results, also
Speaker 3: get results that otherwise are unattainable using a classical computer alone.
Speaker 1: Companies like Google, Microsoft, and Intel are all exploring the
Speaker 1: potential of quantum computing, but there's also a new group
Speaker 1: of contenders, startups that are betting it all on the
Speaker 1: hope that quantum tech will one day become profitable. One
Speaker 1: of those firms is Maryland based ion Q. Its CEO
Speaker 1: is Nicolo Demasi, who believes he has the best horse
Speaker 1: in the race.
Speaker 6: We supply quantum computers to both federal, state and commercial
Speaker 6: customer partners. We also provide quantum key distribution, and we
Speaker 6: do that both on the ground and up in the heavens.
Speaker 6: Quantum key dissolution is effectively quantum cyber security, and we're
Speaker 6: very focused on this not being just proof points in
Speaker 6: the lad lab, but doing useful quantum advantage examples for
Speaker 6: our customers and embedding ourselves into their workflows on an
Speaker 6: ongoing basis.
Speaker 1: So what will it look like as we go beyond
Speaker 1: showing so called quantum advantage in the lab and embedding
Speaker 1: it into real world workflows. One place people look to
Speaker 1: first is in the life sciences work like doctor Garcia
Speaker 1: is doing at the Cleveland Clinic.
Speaker 5: An example of something that we've done is we've taken
Speaker 5: in some of the algorithms that we've worked on for chemistry,
Speaker 5: and alongside Cleveland Clinic, we've started looking at different chemical
Speaker 5: processes that they really care about. So you can think
Speaker 5: about this in the larger context of therapeutics, design, drug discovery,
Speaker 5: that kind of thing, and really what we're doing with
Speaker 5: Cleveland Clinic is pushing the boundaries of algorithm development methodology
Speaker 5: of using quantum computers, again in concert with classical computers
Speaker 5: to come up with solutions to problems that they care about.
Speaker 5: Protein folding is definitely one area mRNA Secondary structure. Understanding
Speaker 5: how things come together and how they look in sort
Speaker 5: of three D is a very interesting area, as you
Speaker 5: can imagine as you're trying to understand how these things
Speaker 5: fit together in a biological system.
Speaker 1: It isn't just life sciences that could be revolutionized by
Speaker 1: the addition of quantum computing. Financial markets are another target
Speaker 1: of opportunity. IBM scored an early advantage this year when
Speaker 1: HSBC said it used the tech company's Heron quantum processor
Speaker 1: to make a thirty four percent improvement in predicting how
Speaker 1: likely a bond will trade at a given price.
Speaker 3: I think there's a lot of excitement in the market
Speaker 3: space as well right especially because optimization is certainly in
Speaker 3: another area which we know is a classically difficult problem,
Speaker 3: and from the point of view of actually using a
Speaker 3: quantum computer to address optimization, are many threads there in
Speaker 3: terms of leveraging this kind of large, exponentially computational space.
Speaker 3: To handle problems such as portfolio optimization right or risk management.
Speaker 3: So there's a lot of interesting ideas there that are
Speaker 3: being looked at by various financial institutions.
Speaker 6: What I can say at this stage is portfolio theory,
Speaker 6: options pricing. These are very much now accessible from a
Speaker 6: quantum advantage perspective using our new tempo system, quantum key
Speaker 6: distribution and cybersecurity that is of course front and center
Speaker 6: for financial services on a global basis, and so security
Speaker 6: and integrity of the data flow is of course vital.
Speaker 6: I always like to jokingly say that you can spot
Speaker 6: our quantum security customers because they are not in the
Speaker 6: news for data breaches.
Speaker 1: Even agriculture could benefit from quantum computing in ways we
Speaker 1: haven't yet imagined.
Speaker 3: Understanding processes such as nitrogen fixation to make things like
Speaker 3: better fertilizer right to help us grow better crops right,
Speaker 3: Understanding things that are critical in impacting climate change right
Speaker 3: and in terms of how carbon is handled right, other
Speaker 3: things including better batteries right in terms of materials discovery.
Speaker 1: The potential may be great, as are the investments being made,
Speaker 1: but when can we expect to see these potentially dramatic results.
Speaker 1: It turns out that that depends on whom you ask.
Speaker 1: IBM has made getting to quantum advantage in the real
Speaker 1: world a strategic priority and has a timeline of getting
Speaker 1: there in a big way by twenty twenty nine.
Speaker 3: Our roadmap really shows the detail in terms of how
Speaker 3: we want to get from today to twenty twenty nine.
Speaker 3: In between, we have this real important milestone also that
Speaker 3: we believe that with the community, we'll be hitting quantum
Speaker 3: advantage right where there will be some problems and claims
Speaker 3: of advantage where we'll see quantum really surpassing any classical
Speaker 3: methods of solving certain types of problems. Right, and we
Speaker 3: are looking at various ways of showing that academically, scientifically
Speaker 3: and also empirically from the ground up in terms of
Speaker 3: compared with various kinds of classical methods today. And then
Speaker 3: we're building a lot of the it's you know, it's
Speaker 3: in the end, it's like architecting a large skyscraper. We're
Speaker 3: building a lot of the foundational elements so that when
Speaker 3: we hit Starling and twenty twenty nine, all the applications
Speaker 3: that people have been developing, all the software stack, all
Speaker 3: the eventual software libraries, they're still going to work that
Speaker 3: they're going to work on a machine that's even more capable,
Speaker 3: something that can run hundreds of millions of gate operations
Speaker 3: compared to several thousands of gate operations on the on
Speaker 3: the advantage level machines that we're building today.
Speaker 1: IBM says it's on track to have quantum computing payoff
Speaker 1: in a big way by twenty twenty nine, but ion
Speaker 1: C's Demasi says they're already there.
Speaker 6: So our machines we announced on September twelfth at our
Speaker 6: Analyst Day are thirty six quadrillion times more powerful than
Speaker 6: anyone else's machine, and that gap is increasing. Not only
Speaker 6: do we believe we are five years ahead of anybody
Speaker 6: else in the quantum computing business, whether it's government programs, adversaries,
Speaker 6: or commercial companies, but we also have the lowest unit economics,
Speaker 6: so we're able to build a fully tolerant two million
Speaker 6: Cuba system and keep our cost of good souls under
Speaker 6: thirty million dollars. Taking that together, it means that we're
Speaker 6: a fully flagged quantum Internet solution. We can provide our
Speaker 6: customer as a platform of computing, cybersecurity, networking, communications and sensing,
Speaker 6: and there's no other company in the history of the
Speaker 6: world that's evering able to supply a complete quantum Internet.
Speaker 1: Everyone in the quantum business seems to agree that Einstein
Speaker 1: was wrong, that it's either coming soon or is already here,
Speaker 1: and that it will be big. But figuring out who's
Speaker 1: ahead in this race sometimes feels like predicting those dice.
Speaker 1: IBM says it's ahead because it has more total cubits
Speaker 1: in its machines. Ion Q says it's not the number
Speaker 1: of cubits, but the number of algorithmic cubits, putting it
Speaker 1: in front. And quantum company Continuum has yet a third
Speaker 1: measure of quantum value. Maybe we shouldn't be surprised that
Speaker 1: there isn't a single measurement. It's like those cubits that
Speaker 1: are both ones and zero's at the same time until
Speaker 1: they're observed. And it looks likely that we will all
Speaker 1: be able to observe what quantum computing can do for
Speaker 1: us in the very near future. Up next, an aging
Speaker 1: population meets lower interest rates. It's a problem countries throughout
Speaker 1: the West are facing. We tell the story of what
Speaker 1: the Netherlands is doing about it. This is a story
Speaker 1: about nest eggs. Those nest eggs were all supposed to
Speaker 1: be putting away for our retirement years, with or without
Speaker 1: the help of the government or employers. Unfortunately, too many
Speaker 1: of us count on support that may or may not
Speaker 1: be enough to carry us in our later years. We
Speaker 1: have still fifty seven million Americans who don't have any
Speaker 1: savings or any retirement plan, whether it's state funded pension
Speaker 1: plans for teachers and policemen or Social Security for everyone.
Speaker 1: We all know about the looming problems in providing adequate
Speaker 1: income for retirees in the United States, but it's not
Speaker 1: just the US that has a problem.
Speaker 7: Many countries made provisions for those promises, and now promises
Speaker 7: are being cashed in, and many countries are saying, oh wait,
Speaker 7: you know we don't want to pay the bill.
Speaker 1: Teresa gillard Ucci is professor of economics and policy analysis
Speaker 1: at the New School in New York and author of
Speaker 1: Rescuing Retirement with Tony James. The challenges faced by retirees
Speaker 1: around much of the world are reflected in higher poverty
Speaker 1: levels of those over sixty five, with the OECD reporting
Speaker 1: that forty percent of the elderly in Korea live on
Speaker 1: less than half of the median income in the country
Speaker 1: and the United States just under twenty five percent. Gilarducci
Speaker 1: says one of the reasons is lower interest rates.
Speaker 7: The life expectancy does not put a strain on pension system,
Speaker 7: but what has changed as over the past twenty years,
Speaker 7: there was a regime of very low interest rates for
Speaker 7: lots of reasons. One of them was a financial crisis.
Speaker 7: A lot of it was the way that we managed
Speaker 7: our economies was to make sure that capital investment was low.
Speaker 7: That distorted a lot of decisions. But one of those
Speaker 7: things that it distorted is that the safe assets like
Speaker 7: government bonds didn't pay much.
Speaker 1: The US is hardly alone in facing the coming retirement crisis,
Speaker 1: but one country, the Netherlands, is doing something about it.
Speaker 1: Adrian Riker's firm is one of those putting those funds
Speaker 1: to work.
Speaker 8: In the Dutch pension system. In the second pillar, there
Speaker 8: are around sixteen hundred billion euros of assets under management,
Speaker 8: which equates to around one point five two times the
Speaker 8: GDP of the Netherlands.
Speaker 1: That one point six trillion euros in Dutch pension assets
Speaker 1: accounts for fifty nine percent of all European pension funds,
Speaker 1: while having only four percent of the population, which means
Speaker 1: that it ranks near the bottom of the OECD numbers
Speaker 1: in elderly poverty at just under five percent, But despite
Speaker 1: having more assets set aside for retirement than any other
Speaker 1: European country, the Netherlands is about to overhaul the fundamentals
Speaker 1: of its pension system.
Speaker 8: Now we are moving from defined benefits to defined country
Speaker 8: and the reason for this change is mainly to increase
Speaker 8: the sustainability of the fund towards the future.
Speaker 1: At first glance, the math seems straightforward. The old model
Speaker 1: wasn't sustainable, it was time for something new, But the
Speaker 1: debate over restructuring the system was anything but simple.
Speaker 9: The private pillar is what is in the process of
Speaker 9: getting reformed now. That reform took a number of years
Speaker 9: to reach. Discussions started in the early two thousands after
Speaker 9: the dot Com crisis, when a number of Dutch pension
Speaker 9: funds sought a coverage ratios drop. It came to a
Speaker 9: conclusion sort of around the started pandemic when the shape
Speaker 9: of the current Pensruon reform was decided upon.
Speaker 1: Stan Voiger is a senior fellow in Economic policy Studies
Speaker 1: at the American Enterprise Institute and director of the Netherland
Speaker 1: America Foundation.
Speaker 9: That didn't mean, of course, that the political discussions around
Speaker 9: the reform completely dissipated. In the outgoing government, the Scove
Speaker 9: Cabinet that was in place for the past year or so,
Speaker 9: there was there was one political party, the New Social
Speaker 9: Contract Party, that was quite aggressively opposed to the Benson
Speaker 9: reform as it had been designed, and they in fact
Speaker 9: tried to derail it by letting individual workers and retiaries
Speaker 9: vote on an industry by industry, or occupation by occupation,
Speaker 9: or even firm by firm basis on whether to remain
Speaker 9: under the old pension system, which is a defined benefit
Speaker 9: system basically, or whether to accept the transition to the new,
Speaker 9: more collective, defined contribution system. That effort by them ultimately failed.
Speaker 9: It lost a vote in Parliament, but only barely, and
Speaker 9: I think that was really the end of political uncertainty
Speaker 9: around this Benson reform, not only because that vote failed,
Speaker 9: but also because the Scove of government fell. This summer
Speaker 9: we had elections and the party most associated with those
Speaker 9: efforts to basically undo the pension reform to a significant extent,
Speaker 9: that party lost all of its seats in Partland.
Speaker 1: The Dutch pension plan changes may be controversial, but necessary
Speaker 1: given the larger forces that all retirement plans in western
Speaker 1: countries are facing.
Speaker 8: The move to define contributions is something that we see
Speaker 8: all across the globe if we look at the pension
Speaker 8: index that is published yearly, if you look at what
Speaker 8: pension advisors and actuaries are saying exactly. These changes are
Speaker 8: not specific to just the Netherlands, but because we have
Speaker 8: such a large pension build up, we have so much
Speaker 8: capital in the system, very high adequacy rates. It is
Speaker 8: very prevalent in the Dutch system. Since the global financial crisis,
Speaker 8: interest rates have been in steady decline, mainly because of
Speaker 8: monetary policy and because of the way that pension liabilities
Speaker 8: are valued. They have a direct link with interest rates,
Speaker 8: and as interest rates decrease, the liabilities of pension funds
Speaker 8: increase and thus place a burden on the pension fund sustainability.
Speaker 8: But also on top of that you have longevity which
Speaker 8: has increased amongst the participants, and coverage in the Netherlands
Speaker 8: of the second pillar pensions is very high. The way
Speaker 8: in the old system that we had, the way it
Speaker 8: worked is that employees would usually stay at the same
Speaker 8: firm that they started at or stay within the same
Speaker 8: industry and work until the retirement age. And if this happened,
Speaker 8: the current pension system was perfectly equipped for this, but
Speaker 8: nowadays we see more and more people moving away from
Speaker 8: a lifetime employment and moving more into self employment.
Speaker 1: One way to address the increased number of people relying
Speaker 1: on their pensions amid lower interest rates might be to
Speaker 1: extend the time when people start receiving their benefits, but
Speaker 1: that is not the way the Netherlands chose to go.
Speaker 8: The reforms mainly are in the way we invest in,
Speaker 8: changing from defined benefits to only defining the contribution.
Speaker 1: The Dutch system is designed to increase the size of
Speaker 1: the available pie by permitting pension asset managers to invest
Speaker 1: in higher risk and higher yield assets for younger workers
Speaker 1: with many years to go until their retirement.
Speaker 8: You now go to a more individual approach with your
Speaker 8: collective investments, in that you have to see what individual
Speaker 8: investors need at certain age age groups. So, for instance,
Speaker 8: a young person on average has less financial capital but
Speaker 8: still has a lot of years to work in its career,
Speaker 8: and what that enables younger investors to do is to
Speaker 8: take on more risk because the biggest determinant of capital
Speaker 8: build up at a young age is the contributions you
Speaker 8: get each year. But as you near the end of
Speaker 8: your career, contributions become less of a big part, less
Speaker 8: of a big influence on the income that you will
Speaker 8: have on retirement, and the income or the focus shifts
Speaker 8: from contributions to investment results that should be stable and
Speaker 8: lower in shocks.
Speaker 1: Whether permitting more flexible investments, particularly riskier ones for earlier
Speaker 1: in a worker's life, will work or not. It does
Speaker 1: relieve the pensions from facing obligations greater than their resources,
Speaker 1: but also means that one's benefits could go up or
Speaker 1: down depending on the markets. Getting people to agree to
Speaker 1: this big change took time and all the stakeholders working together.
Speaker 9: One distinguishing feature of the Dutch system of policy making
Speaker 9: is that there is a lot of focus on consensus
Speaker 9: building between employers, employees, and the government. The fact that
Speaker 9: ANUELYS has these structures that facilitate the coming together of
Speaker 9: business and labor, I think, is particularly helpful in the
Speaker 9: pension context. There are lots of political problems where there
Speaker 9: are all sorts of other stakeholders involved, but in the
Speaker 9: pension context it really still is employers and employees who
Speaker 9: have to come together and reach agreement on on how
Speaker 9: to design the pension system.
Speaker 1: What can the rest of the world learn from the
Speaker 1: Dutch in providing for retirement, perhaps a lesson in persistence.
Speaker 1: The most recent changes are just the latest in a
Speaker 1: series of attempts at pension reform, go back to the
Speaker 1: eighties under Ronald Reagan, when they did take steps to
Speaker 1: try to extend SoC security. What made it possible then,
Speaker 1: that doesn't make it possible now.
Speaker 7: Well, what made it possible for a bipartisan commission and
Speaker 7: of fits to happen was that the crisis was only
Speaker 7: one year away. It had to do with surprise inflation
Speaker 7: and a surprise among the actuaries that they wouldn't have
Speaker 7: enough money in the shortfall. So money needed to be
Speaker 7: infused into the system immediately, and so the Green Span
Speaker 7: Commission under the Reagan administration recommended that the payroll tax
Speaker 7: be increased, and everybody agreed. Later, when it came to Congress,
Speaker 7: there was some political effort to say, well, if we're
Speaker 7: going to raise taxes, we have to really look to
Speaker 7: see how much the taxes have to be increased. And
Speaker 7: so that's when they looked at the past and said, well,
Speaker 7: since everybody's living longer, then we should have a system
Speaker 7: that represents that and will raise the retirement age to
Speaker 7: sixty seven. But that cut and benefit was going to
Speaker 7: be in the future, and they all agreed they needed
Speaker 7: infusion of cash, and taxes were increased. Maybe that's what
Speaker 7: we need to raise taxes, is to have a real
Speaker 7: look at what taxes pay for everyone likes their social
Speaker 7: security benefits, whether.
Speaker 1: It's relying more on the capital markets like the Netherlands,
Speaker 1: or turning to taxpayers to contribute more. The United States
Speaker 1: and other Western nations have some tough choices to make,
Speaker 1: and they need to be made sooner rather than later,
Speaker 1: as people live longer and we want to provide for
Speaker 1: them without stealing from the future. Coming up, getting to
Speaker 1: zero emissions despite those data centers, Finland leads the way.
Speaker 1: This is a story about featuring a problem instead of
Speaker 1: fixing it. This month at COP thirty in Brazil, world
Speaker 1: leaders are trying to get back on the path the
Speaker 1: net zero emissions despite the huge and growing demand of
Speaker 1: data centers for more energy. But European country is already
Speaker 1: a decade ahead. Finland has set the most ambitious climate
Speaker 1: target in the world, pledging to reach carbon neutrality by
Speaker 1: twenty thirty five, and it's featuring the problem of data
Speaker 1: center growth to get there. Bloomberg's Tom mackenzie has the
Speaker 1: story from Helsinki.
Speaker 10: Finland, home to five million people and three million saunas.
Speaker 10: Here warmth isn't just a comfort, it's a culture. But
Speaker 10: now the nation that has perfected staying warm in any
Speaker 10: condition is finding a new way to do it. Fifty
Speaker 10: meters below the streets of Helsinki a hidden network of
Speaker 10: tunnels hums with.
Speaker 1: The sound of machinery.
Speaker 10: Oh so where are we?
Speaker 11: We are at the Helen here pump station where you're
Speaker 11: calling for their helsincodatas and we take the cool and
Speaker 11: sell it as a hereed for the Herzig households.
Speaker 10: Our guide through this underground maze is Oli Circa, CEO
Speaker 10: of helen one of Finland's largest energy providers and the
Speaker 10: company turning data center heat into power for the city.
Speaker 10: Here's how it works. Above ground data centers, the engines
Speaker 10: of our digital lives, generate vast amounts of heat as
Speaker 10: they power everything from AI to streaming video. That heat
Speaker 10: is captured and piped into Helen's system, where heat pumps
Speaker 10: raise its temperature even more and send it through the
Speaker 10: city's district heating network. The same system then returns cooled
Speaker 10: water back to the data centers. It's a test case
Speaker 10: for whether our growing digital appetite for energy can be contained.
Speaker 10: When you have partners like and Microsoft and tell you
Speaker 10: a come to you to work with you and partner
Speaker 10: with Helen, what are they getting exactly in that partnership.
Speaker 12: They have a problem with heat and they need to
Speaker 12: cool down somehow their premises. And now our job is
Speaker 12: to sell heat. So the starting point for this custom
Speaker 12: is really good, and in the end we can actually
Speaker 12: monetize their problem.
Speaker 10: Can you just unpack the business part of that.
Speaker 12: So in normal case, if you build a for example,
Speaker 12: one hundred megawatt data center, almost all of that power,
Speaker 12: practically all of that turns to heat, and they need
Speaker 12: to get rid of that. They need to invest in
Speaker 12: heat pumps and all kinds of cooling equipment. And if
Speaker 12: they cooperate with us, they don't have to do that investment.
Speaker 12: We do it for them, and we take the heat
Speaker 12: out and on top of that, we monetize the excess
Speaker 12: heat by selling it to our customers, so they save
Speaker 12: all the cooling costs and it turns to business for us.
Speaker 10: So that's a big CAPEX outlet, yes for you and
Speaker 10: Capex that they don't have to be putting exagnufacturing into
Speaker 10: their spending plans exactly.
Speaker 12: The CAPEX is needed, but it's done by us and
Speaker 12: we can get a very good profit double business around
Speaker 12: that CAPEX, so it works for us.
Speaker 10: For the local community, the benefits are tangible electricity prices
Speaker 10: that sit below the EU average. Helen's newest partnership is
Speaker 10: expected to provide warmth for roughly fifteen hundred homes.
Speaker 11: We have been able to increase our profits at the
Speaker 11: same time. We have now lowered our prices door times
Speaker 11: in a row during the last four years.
Speaker 10: The impressive progress in Helsinki is set against a challenging
Speaker 10: global backdrop. According to Bloomberg New Energy Finance Research data,
Speaker 10: centers could consume about four point four percent global electricity
Speaker 10: by twenty thirty five. If they were a country, they'd
Speaker 10: rank fourth in electricity use, just behind China, the US,
Speaker 10: and India, and cooling them already takes up nearly a
Speaker 10: third of that energy. According to the World Economic Forum.
Speaker 13: So this is the buzz of the Internet and our
Speaker 13: digital society. So in here you have what we sometimes
Speaker 13: referred to as clouds.
Speaker 10: Helen manages the heat, but it's Equinics that runs the
Speaker 10: data centers, more than two hundred and seventy of them worldwide.
Speaker 13: A data center is a part of everything we do digitally.
Speaker 10: Regina Donata, Dlstrom heads their Nordic operations.
Speaker 13: So inside of these are servers that are collocated by
Speaker 13: enterprise customers of Equinics and Connectivity so connections. So altogether
Speaker 13: we host over four hundred and ninety thousand connections at Tecinics.
Speaker 10: Four hundred ninety thousand connections, and those connects and the
Speaker 10: work that's being done by these service creates a lot
Speaker 10: of heat. You can feel it here in the data center.
Speaker 13: It does, it does. Managing the heat is one of
Speaker 13: the larger parts in operating a data center.
Speaker 10: The heat a reminder that every click, stream and search
Speaker 10: has a footprint somewhere in the real world. Managing it
Speaker 10: is one thing. Finding a way to use it sustainably
Speaker 10: is another.
Speaker 13: The way we measure our data centers is very thoroughly
Speaker 13: with efficiency measures. Per each square meter that's on top
Speaker 13: of mind of any data center operator, because that's money,
Speaker 13: and it's also a proof point to how good of
Speaker 13: a data center you have towards your customers. On top
Speaker 13: of that, we add back to the society in which
Speaker 13: we invest in infrastructure.
Speaker 10: Around the world. The race to build for AI is
Speaker 10: putting new strain on power grids and sparking a backlash.
Speaker 10: A Bloomberg analysis of wholesale electricity prices across the US
Speaker 10: found that electricity now costs as much as two hundred
Speaker 10: and sixty seven percent more for a single month than
Speaker 10: it did five years ago in areas located near it
Speaker 10: significant data center activity. When you look at some of
Speaker 10: your competitors in the data center field, is it a
Speaker 10: sense of frustration or kind of head in your hands
Speaker 10: moment when you look at the fact that a lot
Speaker 10: of these data center operations don't seem to be thinking
Speaker 10: about all the different components that go into it in
Speaker 10: terms of addressing the energy needs.
Speaker 13: No, saying that a data center is a data center
Speaker 13: is like saying a factory is a factory. We do
Speaker 13: cool location services for enterprises, and I would say that
Speaker 13: respecting my peers in that part of the data center industry.
Speaker 13: Most of us do care about sustainability.
Speaker 10: I guess the critics would say, in this rush to
Speaker 10: build out for AI, that corners are going to be
Speaker 10: cut when it comes to energy and to sustainability.
Speaker 13: And I think in any of the technology the waves
Speaker 13: that we've seen, whether that was IoT or five G
Speaker 13: or building up broadband, yes, there are some that get
Speaker 13: it wrong. There are some that cut corners. There are
Speaker 13: some that think they've got it right, and then actually
Speaker 13: the application of the services changes. I think this is
Speaker 13: no different.
Speaker 10: The question now is can the race to get there
Speaker 10: first coexist with the desire to get it right. Nowhere
Speaker 10: is that question more urgent than in the US, home
Speaker 10: to more than five four hundred data centers, more than
Speaker 10: all other major economies combined, and most of the electricity
Speaker 10: to run those data centers still comes from gas and coal,
Speaker 10: which are also expected to meet much of the country's
Speaker 10: new power needs over the next decade. Put simply, Finland
Speaker 10: may offer a glimpse of what's possible, but the real
Speaker 10: test is whether that model can scale worldwide. It's a
Speaker 10: question that Noah Conja has put a lot of time
Speaker 10: into answering.
Speaker 4: The Finnish case is slightly different and across Scandinavia because
Speaker 4: they have a lot of existing heat networks, and in
Speaker 4: a lot of other countries they're not as well developed
Speaker 4: for heat networks. Having said that, it is still possible
Speaker 4: to apply some of the learnings. One of the key
Speaker 4: ones is working with a utility or heat network operator
Speaker 4: that's keen and supportive.
Speaker 10: In Gonja pioneered the technology Equinix uses here in Finland
Speaker 10: and says its applications could be endless.
Speaker 4: It's important to point out that the heat export will
Speaker 4: tend to only work in the right types of climates,
Speaker 4: so those climates where there is a need for heating,
Speaker 4: so it won't be applicable for example in Dubai or
Speaker 4: South Africa where it's a very hot climate. So it'll
Speaker 4: be probably mostly northern Europe and the northern part of
Speaker 4: North America as well. And so what tends to be
Speaker 4: the limiting factor isn't whether you can technically connect in
Speaker 4: the data centers, but it's usually whether there's a partner
Speaker 4: who's actually willing to develop a heat network and make
Speaker 4: the captain investment.
Speaker 10: Do you also do it because it's a valuable revenue stream.
Speaker 4: It's not a really significant revenue stream compared to the
Speaker 4: overall data center business. So we're not looking at heat
Speaker 4: export as a new revenue stream. We're looking because it
Speaker 4: supports our customer sustainability targets and reporting.
Speaker 10: And the model hasn't gone unnoticed. Microsoft, one of the
Speaker 10: world's largest cloud operators, is building its own version, expanding
Speaker 10: the idea at a massive scale. Ian Doherty leads the
Speaker 10: company's cloud operations in Europe, the Middle East and Africa.
Speaker 14: We're very proud of the project that we're working on
Speaker 14: in Finland. We're working with Fordham to leverage the waste
Speaker 14: heat from our data center to decarbonize their local heating
Speaker 14: system and provide heating to local homes over two hundred
Speaker 14: and fifty thousand local homes in vote.
Speaker 10: In the data center, rate efficiency is the new currency,
Speaker 10: and even the world's biggest hyper scalers aren't immune from
Speaker 10: the pressure to balance growth with sustainability.
Speaker 14: Clearly, AI is growing in its use case and diffusion
Speaker 14: across the globe, and we're seeing that in our own business,
Speaker 14: and clearly we need to do more of the same
Speaker 14: things in sustainability and contract further renewable energies. So there's
Speaker 14: a lot of great opportunities that we have ahead of.
Speaker 10: Us, momentum is building.
Speaker 1: In Finland.
Speaker 10: Almost one hundred data center operators are in discussions with
Speaker 10: Helen exploring projects that would feed their own excess heat
Speaker 10: into the city's energy system. What do you think your
Speaker 10: example says about Finland's approach to decarbonizing its economy but
Speaker 10: growing at the same time.
Speaker 12: Well, I think, and I hope we can show to
Speaker 12: the rest of the world that you can do the
Speaker 12: decarbonizing in a profitable way, because I don't believe it's
Speaker 12: going to happen if it's forced by state or EU
Speaker 12: or any other regulatory issues. You have to find a
Speaker 12: way how to go to CEO two zero so that
Speaker 12: you can make money with that. Then it starts to happen,
Speaker 12: and I really hope it can be an example how
Speaker 12: that is done.
Speaker 10: In a moment when our digital lives demand more than ever.
Speaker 10: Helsinki offers a quiet reminder that progress isn't measured only
Speaker 10: in speed and scale, but in the balance we keep
Speaker 10: as the world races ahead.
Speaker 1: That does it for us. Here at Wall Street Week,
Speaker 1: I'm David Weston. See you next week for more stories
Speaker 1: of capitalism.